Family office investment in real estate poised to increase

Real estate investors, including family offices, continue to look for stability in a rapidly evolving market, global economy and geopolitical landscape. Family office investment in real estate will continue to increase as rates normalize and repricing becomes clearer, leading to increased deal flow.

Smart money usually moves first, and large transactions have increased as real estate megafunds place bets across real estate sectors and investors bet their capital on the operational knowledge of seasoned fund managers. But it’s not all about megafunds—middle market funds will also soon be taking advantage of opportunities in this recovery.

Why family offices prefer real estate

Real estate in a family office portfolio has long been regarded as a critical investment for maintaining generational wealth due to its tax-advantaged benefits, sustained cash flow and long-term appreciation. Fundraisers across all real estate markets continue to focus on opportunities to secure family office capital. Amid disruption in some sectors such as commercial office space, family offices are reviewing real estate portfolio risk-and-return profiles and adjusting allocations accordingly. Market headwinds have changed the investment strategy of many family offices as they strategize how to improve their risk profiles by investing at different points in the capital stack through private credit, preferred equity or historical limited partner positions.

The 2024 capital raise has been a story of big funds reporting record amounts of capital raise as investors look for a soft landing and a less competitive capital market environment. A major source of this capital comes from family offices looking to lower their dispersion and downside risk by investing in real estate megafunds.

Leveraging family office capital

Family office capital is considered a “golden egg” for many real estate funds. Due to their flexibility and mass wealth, family offices can make an initial investment that evolves into a partner role as opportunities enter the market. Moreover, the relationship-based approach of family offices is valuable to real estate funds looking to secure long-term capital from a source that has the patience to weather macroeconomic volatility in exchange for healthy cash flow and long-term appreciation.

J.P. Morgan Private Bank’s 2024 Global Family Office Report, which presented the results of 190 single family offices (SFOs) surveyed globally, noted the average family office portfolio allocation to alternative assets is 45%, with a targeted return of 11%. The survey further reported that real estate generally accounts for 14.4% of assets under management for family offices, just under private equity at 18%.

In 2023, family offices increased their direct investments in private real estate as a strategy to achieve higher returns. During the same period, co-investment activity also rose, as we saw families invest alongside funds with aligned interest, to increase transparency and flexibility in exit strategies. Family offices have remained focused on real estate due to the resilience of the asset class and continued strong fundamentals in core markets.  

The appeal of megafunds

The UBS Global Family Office Report 2024, which presented insights from 320 SFOs, reported that 39% of participants mentioned “real estate correction” as a concern when asked about portfolio risk in the next 12 months. Perhaps as a result of this sentiment, we are seeing increased family office capital allocation to megafund managers due to their ability to spread out the risk. In turn, megafunds have wasted no time in making moves into real estate: These include KKR’s recent $2.1 billion bet on 5,200 units from Quarterra and Equity Residential’s plans to acquire a  $1 billion apartment portfolio from Blackstone Real Estate, reaffirming confidence in the multifamily market.

Driving the megafund trend, private credit strategies have proved to be the darling for dollars as investors enjoy hearty returns in a higher-for-longer interest rate environment. Morgan Stanley predicts the private credit market will grow to $2.8 trillion by 2028. Private credit funds provide investors with flexible risk-and-return profiles in real assets via direct lending, mezzanine debt, second-lien debt, distressed debt and hybrid preferred equity offerings.

Family offices navigate new investment strategies

It is becoming apparent that families want new investment strategies to increase their cash flow and achieve long-term appreciation, and the current capital market has presented unique opportunities.

As distressed real estate funds take advantage of debt capacity situations, we will see behavior change around investing in real assets. Family office risk appetite may decrease, leading to movement in the capital stack. For instance, family offices may choose to invest in private credit funds; real assets senior debt or mezzanine debt; or a hybrid of debt and equity positions.

Meanwhile, the economic outlook is clouded with proposed legislation for additional regulations and tax reforms that could affect investments. Any changes to public policy concerning rent control, squatter rights, property taxes, insurance regulations and federal tax reforms can and will have an impact on the real estate industry. 

The takeaway

Amid a rapidly evolving landscape, family office investment in real estate is poised to increase, with deal activity focused on megafunds. However, opportunity awaits middle market funds looking to get in on the action. While the last mile to the soft landing may be complicated, more investment in real estate amid rising optimism is always good.